Traditionally, the European Union has adopted a laissez-faire approach towards the regulation and governance of charitable organizations. The legal enablement of these bodies occurs in the national legislation of Member States and thus stops at the borders of those countries, forcing nonprofit organizations that work across borders to grapple with different national legal and regulatory regimes. Different tax laws, different company laws and at times, different charity laws therefore apply to charitable organizations that wish to work across a number of European Member States. In some instances, the European Union lacks competence to harmonize national laws — for example, in the area of direct taxation.1 In other areas, such as company law, the EU has legislative competence to harmonize national laws but has chosen to exclude nonprofit organizations from the scope of its regulatory efforts. Whatever the underlying reason for this lack of enablement — whether classified as benign neglect or legal parsimony on the part of EU institutions — the current European legal regime prevents nonprofit organizations from fully enjoying the benefits of the common market.

One solution commonly proffered as a panacea for nonprofit organizations’ difficulties is to develop a European legal vehicle to facilitate nonprofits that operate on a pan-European basis. To this end, demands have been made for a European Statute for Foundations and a European Statute for Associations, enacted by way of European Council Regulation and thus directly applicable in all Member States. These European vehicles, the argument runs, would have transparent and uniform requirements in each State and thereby cut down on the legal and administrative bureaucracy that nonprofits currently endure in attempting to open new branches or deal in Member States other than their founding Member State. The advantages cited in support of the adoption of such European Statutes2 tend to be three in number. First, proponents argue that the statutes would facilitate the giving and receiving of gifts and grants across borders and the general improvement of cross-border operations and activities of funders and foundations in Europe. Second, the provision of new instruments for cooperation among funders would both enhance the existing well-established practice of co-funding and engaging in joint activities and projects throughout the EU and assist in the increasing number of trans-national collaborative projects between European nonprofit organizations in other countries. And third, the statutes would enable nonprofits to enjoy the freedom of establishment for all activities that contribute to the objectives of the Community, irrespective of the form taken by the nonprofit that carries them on.

Legislative proposals for European foundation and association statutes have enjoyed considerable support in the nonprofit sector. In a recent Commission Consultation paper on Future Priorities for Company Law Action, responding foundations unanimously endorsed a Commission proposal for a feasibility study on the need for a European Foundations Statute.3 The response rate to the question was an impressive 55 percent of respondents,4 with many foundations responding exclusively to this question in the Consultation,5 implying strategic lobbying by these organizations. Advocates of a European legislative solution seek parity of treatment for nonprofit organizations with for-profit entities and view the European Company Statute, enacted in 2000 to provide a common European legal vehicle for public limited companies (plcs), as an ideal template for a similar statute tailored for nonprofit organizations.

This paper takes issue with those who view the introduction of a European regulation as the most effective way to facilitate nonprofit activity in the EU. It argues that the judicial route and not the legislative route may prove more fruitful if the aim is to achieve greater legal enablement of civil society organizations within the European Union. Part II outlines the difficulties associated with uniform European regulatory solutions in company law and explains why a European legal instrument will not provide an effective answer to the problems currently facing nonprofit entities. In the absence of a legislative solution, Part III considers alternative judicial and political attempts to create a legally enabling environment for nonprofit organizations in the EU. Finally, Part IV puts the judicial developments relating to nonprofits in the broader political context of an emerging European Union that can no longer be viewed solely in terms of economics. The paper concludes that given the evolving nature of the relationship between EU institutions and civil society organizations, a judicial solution to facilitate cross-border nonprofit and charitable activities may be politically more effective and timely than a statutory solution.

II. European Statutes: Inappropriate Instruments for the Creation of a Legally Enabling Environment for Nonprofit Organizations

The Background of the European Company Statute

The idea for a European Council Regulation,6 creating a European legal form recognizable in all Member States, is not new. The debate on the need for a European Company Statute began in Paris in the 1960s7 Although there was little disagreement as to the general principle, achieving consensus on the details proved difficult. Over the following 20 years the Commission published various proposals8 for a European company model, but deadlock continued to persist in the European Council over the prescribed forms of worker participation in the proposed model.9 A breakthrough occurred with the completion of the internal market in the early 1990s, when the Commission published new initiatives to revive the Company Statute.10 The publication of the Davignon Report11 in 1997 enabled real progress to be made and the European Council finally adopted the European Company Statute in Nice in 2000.12 The European Company Statute (“ECS”) came into force in 2004.13 The objective of the ECS is to enable companies incorporated in different Member States to merge or form a holding company or joint subsidiary while avoiding the legal and practical constraints arising from the existence of 27 different legal systems. Although the intention in 1960 was to enable people to form a company governed entirely by European principles rather than the laws of any particular Member State,14 legal realities and cultural differences forced the drafters to modify the model. The final version consists of a “European” public company that is registered in one Member State, governed by the Statute in certain key areas (e.g., minimum capital, management structure, shareholder meetings) but otherwise is subject to national laws for public companies. The ECS specifically does not apply to nonprofit organizations.15

The ECS experience illustrates the difficulties of attempting to accommodate the intricacies of divergent national company laws in one all-encompassing Council Regulation. The limited format of a legal regulation does not lend itself to the distillation of the granular details necessary to create a generic legal vehicle that will work uniformly and coherently in all 27 Member States. Drafters of the ECS were forced instead to adopt certain lowest-common-denominator requirements that can apply to all Member States by regulation, with issues that are not expressly covered by the regulation left to be decided by national law.16 Whereas minimum capital requirements, management structure, employee rights, and shareholders’ meetings are governed by a European standard, other important matters (such as directors’ liability, audits and accounts, liquidation and insolvency, tax, and registration and publication of documents) still fall under the relevant national law. The troublesome issue of employee involvement has been dealt with by an accompanying Council Directive and individual Member State legislation.

The Practical Effectiveness of the Societas Europae

The commercial adoption of the European company, or “SE,” as it is known,17 has not been overwhelming. To date, there have been 105 SEs established throughout the EU.18 Many of these have begun not to facilitate the conversion of existing autonomous business operations in different Member States into one pan-European company, but rather to assist new entities that want to enter a market quickly.19 According to the European Employers Federation (UNICE), the perceived weaknesses of the SE include the absence of an agreed tax regime and the creation of now 27 different national statutes to give effect to the Directive.20 The value of a legal structure without these elements is limited since it cannot effectively facilitate cross-border trade, a flaw predicted by some commentators before the European Company Statute was enacted.21

The practical utility of the SE remains in doubt: in the Commission’s Report on Consultation and Hearing on Future Priorities for the Action Plan on Modernising Company Law and Enhancing Corporate Governance in the European Union22 60 per cent of those responding to the question about the utility of ECS did not think the Statute was either very useful or particularly so.23 Among the practical problems cited by those currently using the SE as a legal vehicle were the persistent difficulties caused by the differing national taxation regimes24; the need to coordinate other Community legislation that could obstruct the creation of an SE; and the issue of whether an SE incorporated in one Member State that operates in another Member State (which would require it to register a branch in that Member State if it were a public limited company) should be required to register a branch, given that the practice seems to vary between Member States.25

When surveyed as to whether there was need for a similar European statute for private companies, a quarter of respondents were against its introduction, citing the lack of industry interest in such corporate form. According to the Future Priorities Report, this negative impression was informed by the limited adoption of the existing SE model and yet again, the “ doubted practical value of the Statute due to other obstacles to corporate mobility such as taxation, accounting, insolvency or employee participation issues.”26 Moreover, those in favor of the European Private Company (i.e., three-quarters of the 40 percent of respondents who answered this question) stressed the need for any new statute to provide a “uniform, genuinely supranational form with as few references to the national laws as possible.” In other words, what is sought is an approach akin to the original aspirations for the SE but far removed from the SE model currently in operation.27

Current Obstacles Affecting Civil Society Organizations That Wish to Operate on a Pan-European Basis

Enthusiasm for European Statutes in aid of nonprofit organizations must be considered in the context of this negativity. Responding foundations to the Future Priorities Consultation unanimously urged the Commission to carry out a feasibility study on a European Foundation Statute.28 Non-foundational stakeholders, many of which have experienced operational difficulties with the ECS, dissented. Whereas some of the dissenters adopted a self-interested stance in counseling the Commission to ignore nonprofit organizations,29 the majority of dissenters raised a note of caution as to whether the proposed statute could solve the structural obstacles that now inhibit nonprofit activities throughout the EU.30

It is true that nonprofit organizations, like many for-profit entities, face structural obstacles when they seek to operate on a cross-border basis across the EU. These obstacles take the form of differing legal and fiscal regimes that operate in each of the 27 Member States, with which nonprofit organizations must comply if established in any of these States.31 Imagine, for instance, a donor who wishes to establish a pan-European foundation enjoying charitable tax-exempt status in the EU Member States of Ireland, France, Germany, and Malta.32 To establish the organization, French law requires both registration and State approval, and approval is subject in practice (although not in law) to a minimum capital requirement of €1 million. Germany also requires registration and State approval, but the State enjoys no discretion regarding approval; although there is no official minimum capital requirement for establishment, the foundation must have sufficient assets to carry out its purpose, which generally requires a minimum capital requirement of €50,000. Ireland requires registration with the Revenue Commissioners, with no minimum capital requirement. An organization in Malta must register and, if it wishes to take the form of a “voluntary organization,” must seek State approval. There are de minimis Maltese minimum capital requirements, with the prescribed amount being €240 for social purpose foundations and €1,200 for all others.

Once an organization is established, it faces a variety of governance requirements. Ireland alone requires that a majority of the governing board reside within the jurisdiction. French law requires all foundations to appoint an auditor and a substitute and to file annual returns and financial statements with administrative authorities. These reports must be made publicly available only if the foundation receives annual gifts in excess of €153,000 or support from public authorities. By contrast, German law does not have any publication requirement, although if tax exemption is sought, dual filing is required both to State authorities and to the relevant financial authorities. Irish law requires all charities with an annual income of over €100,000 to prepare audited accounts, but imposes a public filing requirement only on incorporated charities. Even then, this requirement is not consistently applied. Religious charities are statutorily exempt from the requirement to make accounts available.33

Retention of tax exemption also varies. If the foundation carries out activities outside its country of establishment, its tax-exempt status remains unaffected in Malta. French law makes the continuation of tax-exempt status conditional upon proof that the activities are in the public interest and of a nonprofit nature, whereas German law is the most demanding, requiring such activity to have a positive effect on the reputation of Germany and its population before tax-exempt status for foreign activity can be guaranteed.

The diverse laws of the 27 Member States create the greatest difficulties in the treatment of capital-asset movement and tax treatment of donations, particularly cross-border donations. In general, EU Member States agree that there are justifications for granting special tax privileges to charities. The private supply of public goods by charities for the benefit of the community provides the basis for the tax exemptions and privileges that these bodies enjoy. The ability to tax, however, is seen as a sacrosanct power of a sovereign nation. It is an element of sovereignty that Member States have been extremely resistant to sharing with the EC.34 The resulting lack of harmonization has meant that Member States have remained free to develop their own legal criteria for what constitutes public benefit for tax purposes and what ancillary legal requirements are placed on an organization seeking tax relief for its charitable purposes. One such ancillary condition typically relates to establishment — only those organizations established within the territory of a Member State may be eligible for the relevant tax relief. In this way, national tax laws tend to limit tax benefits to domestic charities and discriminate against foreign charities. Of the 27 Member States, only the Netherlands, Poland, and Slovenia allow a resident’s donations to a foreign-based public benefit organization to be income-tax deductible. The Dutch and Polish laws on this topic are newly minted and result largely from national legislatures’ attempts to preempt Commission infringement proceedings.35 These laws, the scope of which has not yet been fully defined, are in the minority. Sixteen Member States do not allow deductibility under any circumstances for such donations, despite allowing deductions for donations to similar domestic organizations.36 The remaining eight States allow deductibility in some limited, exceptional cases.37

Many of these problems equally afflict for-profit companies operating on a transnational basis in the EU, and the introduction of the European Company or “SE” has not solved them. Directors of SEs must still turn to the various national implementing laws to determine issues of liability as well as reporting and auditing requirements. Moreover, the tax treatment of companies using the SE as their legal vehicle has not improved, because in the absence of unanimity at Council level, the Commission lacks the competence to harmonize national tax laws.

The Appropriateness of the ECS Model in the Legal Enablement of Nonprofits

It remains difficult, therefore, to see how the introduction of a European Statute — even one tailored to the specific characteristics of nonprofit associations or foundations — could hope to resolve the central structural problems encountered by such entities. Attempts to develop parallel nonprofit-friendly facilitative regulation to date have failed. In 2006 the Commission withdrew its proposals for Regulations on the Statute for a European Association (ESA)38 and the statute for a European Mutual Society,39 introduced in 1991, on the overarching grounds that they “were not found to be consistent with the Lisbon and Better Regulation criteria, unlikely to make further progress in the legislative process or found to be no longer topical for objective reasons.”40

The withdrawal of the ESA proposal came in the wake of a frustrating 20-year incubation period. Institutional support for an ESA had sprung from the European Parliament’s adoption of the Committee on Legal Affairs and Citizens’ Rights Report on Nonprofit Making Associations in the European Community41 in 1987.42 With a suggested Treaty base in Article 12 EC’s prohibition of discrimination on grounds of nationality,43 the idea behind the European association was to facilitate transnational transactions by nonprofit membership associations. Despite its enthusiastic beginnings, the ESA proposal made little progress for almost 15 years, because its fate — like that of its sibling regulations, the European Statute on Mutual Societies and the European Statute on Cooperative Societies — was tied to that of the ECS.44 Although the latter’s enactment in 2000 gave some renewed impetus to the ESA proposal, the political will necessary to make the ESA a reality did not exist. A number of stakeholders share the blame for this demise. Some Member States viewed the enactment of a European Statute as an unwelcome Commission encroachment into an area of third sector policy previously reserved to national deliberation,45 an unwarranted intrusion for which there was no legal Treaty basis.46 Indeed, the Commission’s commitment to the ESA proposal has not always been constant or consistent, due in part to the lack of definitive Directorate General responsibility for nonprofit associations during the 1990s.47 Similarly, with each rotation of the Presidency of the European Council, the attention given the ESA has varied, depending on the interests of the Member State in control of the legislative policy agenda.48

Support for the ESA in legal circles has also been scarce. In its report to the EU Commission in November 2002 on a modern regulatory framework for company law,49 the High Level Group of Company Law Experts recognized the difficulties surrounding the development of either a European Association or a European Foundation Statute. In particular, it stated that a European form of association was not regarded as a priority for the short or medium term. According to the Group, long-term plans for any such legal vehicle should depend on a review of the European Statute on Cooperative Enterprises.50 In sum, the High Level Expert Group’s overall recommendation was not to proceed with the introduction of the social economy statutes but instead to consider working towards the adoption of model laws instead.51 Arguing in favor of a different regulatory approach, the Group concluded:

The work on such model laws would need to reach agreement on the basic characteristics the European legal form should have, and thus contribute to agreement on a certain level of harmonisation of these national legal forms. Once that level of agreement is reached, the introduction of alternative European legal forms could become feasible.52

Thus, strong opinions of individual Member States (doubting the legal basis for the regulation and querying its proposed scope)53 and of expert legal groups (doubting the utility of the EA as a legal vehicle),54 along with institutional lack of direction, militated against the introduction of the EA. Notwithstanding this death knell of the proposal for a European Statute for Associations, charities have continued to lobby for a European Foundation Statute.55 Institutional openness to this proposal to date, perhaps in light of the ESA experience, has been neither constant nor consistent.56

Part II has illustrated that the ECS has not resolved the legal and administrative hazards for for-profit companies operating on a cross-border basis. Nonprofit organizations experiencing similar problems and charitable organizations experiencing greater difficulties (from a taxation perspective) are therefore unlikely to find that statutory law is capable of creating the legally enabling environment that they seek. The search for an alternative resolution of these difficulties begins with this realization. And, along the lines of Aesop’s fable of the hare and tortoise,57 what cannot be achieved directly by way of legislation often can be better (albeit incrementally) achieved judicially.

The European Court of Justice, aided in part by the European Commission, has been presented with a number of opportunities to reinterpret the Treaty in aid of nonprofit organizations, and particularly charities. From what might be viewed as inauspicious beginnings and the relatively barren soil of the founding Treaty provisions, the Court is using a functional approach to restate the rights and duties of nonprofit organizations under EU law. Legal change for charities that operate in more than one Member State seems likely to result from growing judicial and institutional momentum. Part III traces this evolution from the initial silence of the Rome Treaty towards nonprofits, the rise of Treaty obligations on nonprofits in a number of spheres, and the recent case law elaborating for the first time on the rights of nonprofit organizations under European law.

The Treaty Basis for Community Competence over Nonprofit Organizations

Historically, the Treaty of Rome was silent on the role of nonprofit organizations under EU law. It wasn’t until 2000, with the ratification of the Treaty of Nice, that a reference to “civil society” appeared in the governing provisions of the Treaty.58 The Nice Treaty amended Art 257 EC59 to include reference to “organised civil society” as one of the constituent groupings to be represented by the Economic and Social Committee, thus giving nonprofit organizations an indirect (though largely ineffective) voice in European affairs. For almost 50 years before this, the only express reference to nonprofit organizations in the Articles of the Rome Treaty was a negative one in Article 48 EC.60 Article 48 EC expressly excludes nonprofit bodies based in one Member State from the right to establish in the territory of another Member State,61 a right that is enjoyed by for-profit companies and EU workers. This difference in treatment highlights the EU’s preference for facilitating commercial entities and workers and the circulation of capital within the EU. For a Treaty founded on economic interests and corresponding rights, which created a community for many years known as the “European Economic Community,” this initial disregard for nonprofit bodies is unsurprising. As the European Court of Justice in Sodemare noted:

[Article 48 EC] . . . has the function of assimilating companies, firms and other legal persons, other than those which are non-profit-making (hereinafter normally referred to as “commercial companies”), to natural persons who are nationals of Member States, for the purposes of freedom of establishment. Thus, non-profit-making companies, firms and other legal persons do not benefit from freedom of establishment.62

The Court in Sodemare did not address the significant issue of whether the scope of the Article 48(2) EC exclusion should be interpreted narrowly, as relating to nonprofit establishment rights only, or broadly, as indicating a general lack of Community competence over nonprofit organizations. For its part, the Committee on Legal Affairs and Citizens’ Rights of the European Parliament has chosen to interpret the exclusionary provisions narrowly.63 The Fontaine Report, presented to the European Parliament in 1987, pointed to a number of other Treaty bases that could potentially provide Community competence over nonprofit organizations, such as Article 12 EC,64 Article 308 EC,65 and Article 95 EC.66

Most notable in this regard is Article 12 EC, which prohibits discrimination on grounds of nationality. This provision applies to a State whose legislation reserves to its citizens alone the right to form or administer associations. An opportunity for the European Court to test this legal basis arose in 1998. In Commission v. Belgium,67 the Commission challenged the validity of two Belgian laws that prescribed associational membership. Under a 1919 Belgian law, the conferral of legal personality on an international association pursuing “philanthropic, religious, scientific, artistic or pedagogical objectives” required at least one Belgian member on the executive organ of the organization.68 Similarly, a 1921 Belgian law concerning non-profit-making associations and institutions promoting the public interest required that three-fifths of an organization’s members be of Belgian nationality in order to qualify for legal personality against third parties.69

The Court of Justice ruled that these two laws, making legal personality contingent on the presence of Belgians in an organization or its governing structure, breached Article 12 EC, prohibiting discrimination on the grounds of nationality.70 The Court based its ruling on the freedom of establishment enjoyed not only by Belgian nationals but by nationals of other Member States who wished to form new associations in Belgium.71 It followed that given its membership element, a nonprofit association could not be discriminated against in terms of establishment in a Member State: to do so would indirectly discriminate against citizens of the EU on the basis of their nationality. A foundation, however, is not based on membership, which reduces the applicability of Article 12 EC.

The Fontaine Report did not limit the potential Treaty bases for Community legislative competence over nonprofit organizations to Article 12 EC. The Report put forward two other Treaty articles: Article 95 EC72 and Article 308 EC.73 These two articles operate differently, so it is significant which one is adjudged to be the correct Treaty basis for European facilitative regulation of nonprofit organizations.

Article 308 EC is essentially a catch-all provision, which allows the Council of Ministers to take action to achieve the Treaty’s objectives where the Treaty has not provided the Council with the necessary powers.74 The Fontaine Report believed that facilitating nonprofit activity within the EU could be a Community objective, in the course of the operation of the Common Market. To this end it sought to view the contribution of nonprofit organizations through the lens of European economic activity. In the Report, the Parliament’s Committee on Legal Affairs considered that nonprofit organizations contribute to the economic life of the EC, as both a direct and indirect generator of employment and as a product consumer. For this reason, “it would be incomprehensible for the association sector properly so called to be left on the sidelines on the basis of an incorrect and restrictive interpretation of the Treaty.”75 Accordingly, these organizations could cite Article 308 as a Treaty basis for jurisdiction.

One of the principal difficulties with Article 308 EC, however, is the procedure for its use: legislation based on Article 308 must be passed unanimously by the European Council. Unanimity in a Council representing 27 Member States is a rare occurrence and thus a recipe for inanition and ultimately inaction.

Article 95 EC, by contrast, uses the co-decision procedure with the European Parliament and requires only a qualified majority vote within the Council. Lacking the catch-all quality of Article 308, Article 95 may be used only when the Council adopts “measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market.”

To date, there has been some controversy as to whether Article 95, although more user-friendly, is the appropriate legal basis for introducing legal instruments in support of nonprofit organizations. The Statutes for European Associations and European Cooperative Societies started out with Article 95 as their legal basis.76 Disagreeing with this basis, the Council decided to rely on Article 308 instead.77 The European Parliament, supported by the Commission, unsuccessfully challenged this change of legal basis before the European Court of Justice.78 In procedural terms, this decision reconfirms the need for Council unanimity in adopting social economy statutes. Given the reluctance of some Member States to countenance the adoption of a statute for European Associations,79 the return to unanimous voting in Council greatly lessened the chances of this statute ever being enacted and probably influenced its subsequent withdrawal by the Commission, over the protests of the Parliament and Economic and Social Council.80 The Court’s decision in European Parliament v. Council has also led proponents of the European Foundation Statute tentatively to cite both Articles 95 and 308 EC as appropriate legal bases, a combination that legally is entirely inconsistent.81

Notwithstanding the narrow Treaty basis for Council or Commission competence over nonprofit organizations, the ECJ has found nonprofits to be subject to Community law. In Sophie Redmond Stichting v. Hendrikus Bartol,82 the Court of Justice ruled that under the Directive on the Transfer of Undertakings, European labor law requirements applied to a Dutch nonprofit financed entirely by government.83 In his Opinion, Advocate General Van Gerven acknowledged that never before had the Court been called upon to consider the application of this Directive to nonprofit organizations.84 Nonetheless the AG, with whom the Court ultimately agreed, found that functionally there was nothing to prevent the application of the Directive to nonprofits on the transfer of their employees.85

Similarly, nonprofit organizations have found themselves subject to Community competition rules — in the contexts of cartel and monopoly proceedings and of State aid.86 To be subject to the competition rules, a nonprofit organization must be found to be an “undertaking,” a fact determined by whether it engages in an “economic activity” regardless of its legal status and the way in which it is financed.87 The Court has applied a very broad test, holding that an entity engages in an “economic activity” when it offers goods or services on the market.88 The Court has further held that the non-profit-making nature of the entity in question or the fact that it seeks non-commercial objectives is irrelevant for the purposes of defining it as an “undertaking.”89

In principle, the Court of Justice has held that Community competition and internal market rules ordinarily do not apply when organizations that perform predominantly social functions engage in non-profit-making activities of a non-commercial nature.90 The Commission has interpreted this case law to mean that internal market and competition rules generally do not apply to “non-economic activities” of organizations such as trade unions, political parties, churches and religious societies, consumer associations, learned societies, charities, and relief and aid organizations.91 The definition of “economic” as opposed to “non-economic” activity is not always clear,92 which has had two effects: it has prompted the Commission to consider the need to clarify the rights and responsibilities of nonprofit organizations performing largely social functions93; and it has led the European Economic and Social Committee to seek complete immunity from Community competition rules.94

The recent Italian Banking Foundations case demonstrated the potential implications for charities that are subject to the competition law rules. In that case, the ECJ explored the possibility that tax benefits to such organizations might qualify as State aid and thus be held incompatible with EU competition law.95 The preliminary reference case concerned Italian foundations of banking origin,96 created by statute to be the controlling shareholders in companies engaged in banking activity upon the privatization of Italian public sector credit institutions. The issue was whether these foundations could be subject to the Community rules on competition — even when they were assigned objects of social benefit.97 The Court distinguished between, first, a foundation that simply makes grants to nonprofit organizations98; and, second, a foundation acting directly to pursue public-interest or social-assistance aims, using the national legislature’s authorization to undertake necessary or opportune financial, commercial, real estate, and asset operations. Whereas the former was not an undertaking, the latter had to be viewed as one because “it is capable of offering goods or services on the market in competition with other operators, for example in fields like scientific research, education, art or health.”99 It would seem to follow that where a competing market exists in areas of general interest, such as education, health, science, and research, operating foundations that enjoy national tax exemptions might find themselves in conflict with EU rules on State aid competition.

Nonprofit organizations, therefore, do not enjoy a general immunity from the EU rules that apply to their for-profit counterparts. In the areas of labor law and competition law, nonprofits must comply with Treaty rules. This functional approach to nonprofits logically leads to the extension of the State aid rules to tax exemptions to nonprofit foundations in certain circumstances, an extension that alarms some charitable organizations. If a functional basis lies behind the application of Treaty obligations to nonprofits, is the same true for Treaty rights? The Stauffer case provides an important starting point in this discussion.

The Extension of Treaty Freedoms to Nonprofit Organizations: The Stauffer Case

In Centro di Musicologia Walter Stauffer v. Finanzamt Munchen fur Korperschaften (hereinafter “Stauffer”),100 the Court of Justice was asked whether German corporation tax applied to commercial property in Munich owned by an Italian charitable foundation, when comparable property owned by German charities was exempt. The Stauffer Foundation, established in Italy, endowed scholarships for young Swiss people to study the history of music in Cremona, Italy. Under German tax law, Stauffer pursued recognized charitable objectives. Moreover, the German legislation did not require that the pursuit of such objectives benefit German nationals. In principle, then, the Italian foundation should have been exempt from corporation tax. However, because the foundation’s seat and management were in Italy, its rental income in Germany was subject to tax. A preliminary reference from the German Bundesfinanzhof asked the Court of Justice whether this approach was incompatible with the Treaty’s provisions on freedom of establishment and free movement of capital.

The Court found that the provisions governing freedom of establishment were inapplicable to Stauffer. The Court did not make this finding on the ground that nonprofit organizations can never avail themselves of the establishment provisions. Rather, the Court held that “establishment” is a broad concept. It found that the right of establishment allowed a “Community national to participate, on a stable and continuous basis, in the economic life of a Member State other than his State of origin and to profit therefrom, so contributing to economic and social interpenetration within the Community in the sphere of activities as self-employed persons.”101 This finding advances or perhaps a clarifies the Court’s conclusion in Sodemare,102 in that it does not automatically exclude a nonprofit organization from the scope of the right of establishment if the organization actively contributes to economic and social integration in the EU.103 Stauffer could not rely on the establishment provisions, however, because it did not have a secured permanent presence in Germany for the purposes of pursuing its activities. A German property management agent handled the services ancillary to the leasing of its Munich property.

The free movement of capital provisions in Article 56 EC104 proved more helpful to Stauffer. Capital movement, although undefined by the Treaty, has been interpreted to include, inter alia, investments in real estate on a national territory by a nonresident.105 Article 56 EC forbids any restriction on capital movement between Member States. Because the German tax exemption applied only to charitable organizations established in Germany, the exemption in principle discriminated against charitable organizations established in other Member States. As such, it constituted an obstacle to free movement.106

To maintain the restriction, Germany would have to show that the law was nondiscriminatory in that it dealt with objectively different situations. The German Government, supported by the UK Government, sought to make this argument by distinguishing a charitable foundation with tax exemption (i.e., a charitable foundation resident in Germany) and a foundation like Stauffer, which had limited tax liability due to its residency outside Germany. The German foundation, it was argued, contributed to German society and benefited the State’s budget by relieving the State of some responsibilities. The charitable activities of Stauffer, on the other hand, had no benefits for the German people. The interveners also argued that the conditions for granting charitable status varied between Member States, according to each State’s conception of public utility and its perception of what constitutes a “charitable purpose.” It followed that a foundation deemed charitable under Italian law differed from a foundation deemed charitable under German law.107

The Court of Justice rejected both arguments. Although Member States could require a close link between a foundation’s eligibility for tax-exempt status and its activities, no such requirement applied here—the tax law in question did not require that the charitable objects be carried out on German territory. With regard to the comparability argument, the Court acknowledged that Member States have discretion on whether to confer tax-exempt status on a foreign foundation. Nonetheless, the Court held that even within the area of direct taxation, in which Member States enjoy full competence, their discretion must be exercised in accordance with Community law.108 An organization recognized as a charity within its Member State of origin is not automatically entitled to the same status in another Member State’s territory. But where a foundation meets three conditions—it holds charitable status in one Member State; it satisfies the requirements for charitable status in a second Member State; and it promotes the same public interests (a matter for the authorities of the second State, including its courts, to determine)—the second Member State cannot deny the right to equal treatment solely on the ground that the foundation is established in another State.

It followed that the discriminatory restriction in Stauffer (namely, the requirement of German establishment) could only be saved if it was justified by overriding reasons in the general interest. A number of reasons were put forward: the promotion of culture, training, and education; the need for effective fiscal supervision; the need to ensure the cohesion of the national tax system; the need to protect the basis of tax revenue; and the fight against crime. All were rejected by the Court. The ECJ conceded that a Member State faces difficulties in determining whether a foreign charitable organization fulfills the Member State’s public benefit requirements, and in monitoring the management of the organization. These difficulties, however, are of a “purely administrative nature.” As for the public benefit requirement, the national tax authority could require that the organization produce evidence to support its claim,109 and it could call upon tax authorities in other Member States to validate the information.110 As for the fight against crime, the Court held that a foundation’s establishment in another Member State could not of itself give rise to an assumption of criminal activity; barring tax exemptions on this basis was disproportionate.111

The Likely Effect of the Stauffer Ruling in the Legal Enablement of Nonprofits

The ruling in Stauffer is tremendously important with regard to the legal and policy framework for foreign funding of civil society. Stauffer establishes that in principle, a charitable organization that satisfies a Member State’s requirements for tax exemption cannot be discriminated against in another Member State on the basis of its nonresident status.112 The judgment forces Member States for the first time to consider whether a nonresident charity and a resident charity qualify for comparable tax treatment. Until Stauffer, Member States could deny parity of benefits to nonresident charities through (a) reliance on national tax law and its requirement that an organization have its seat in the Member State; and (b) reliance on the varying requirements of charity law in each country. Stauffer means that a Member State must justify its denial of tax relief to a nonresident charity in substantive terms, based on an analysis of national requirements for charitable status and an explanation of how the foreign requirements satisfied by the applicant fall short. The applicant’s non-residence cannot per se justify discrimination.

Notwithstanding these groundbreaking developments for charities, the Court’s procedural methodology of reasoning has not changed. The ECJ maintains its functional approach in assessing the scope of the Treaty’s freedoms. The fact that Stauffer was a charitable foundation carrying out nonprofit activity was merely incidental to the European Court’s determination of the case. Focusing on the activity in question — the letting of property — and viewing it as an economic activity in its own right, the Court proceeded to consider whether German tax law was compatible with the Treaty.

Substantively, this ruling augurs well for nonprofit organizations in a number of respects. First, because the term capital movement also covers donations,113 charities established in one Member State undoubtedly will seek inclusion in tax schemes of other host Member States that grant tax rebates on donations to resident charities but exclude foreign charities for reasons similar to those in Stauffer.

Second, the scope of capital movement is likely to be tested in the near future. A recently filed application for a preliminary reference, Hein Persche v Finanzamt Ludenscheid,114 asks the Court of Justice to consider whether the free movement of capital applies where a national of a Member State donates goods to a body based in a different Member State, when the goods are recognized as charitable under the law of that Member State (Art. 56 EC). Again the nub of this inquiry relates to taxation: Hein Persche essentially asks the Court whether, under Article 56 EC, a Member State can confer a tax benefit on donations to charitable bodies only if those bodies reside in that State. Although the full facts of the reference have yet to come before the Court, it would seem that on the basis of Stauffer, if donations of goods are covered by capital, neither the lack of residency nor the administrative difficulties borne by the Member State in verifying the details of the donation will justify refusing tax relief as a matter of course. Moreover, an express provision excluding relief on donations to nonresident charities would still require overriding reasons to justify such apparently discriminatory behavior.

Third, the outcome of Stauffer has raised the profile of Third Sector activity in the EU and provided a welcome boost to pending claims that Member State tax regimes discriminate against nonprofits in a way that is incompatible with EU law. Currently, the Commission is investigating the tax regimes of a number of Member States (including Belgium, the UK,115 Ireland,116 Poland,117 and Portugal) in a variety of areas as they relate to charities. The extent of the tax privileges vary in detail between the different States, but in general comprise exemptions from income tax, corporate tax, capital gains tax, capital acquisition tax, stamp duty, deposit interest retention tax, inheritance tax, and in many countries the ability to reclaim taxes already paid on donations received, sometimes referred to as gift tax exemption or gift aid. A common requirement for tax exemption or relief is that the charity in question be based in the country granting the tax break — as was the case in Stauffer — and be recognized as a charity or public benefit organization according to the laws of that country. These requirements create tax difficulties for (a) donors who live and pay taxes in a different Member State from their original home State (i.e., expatriates) and who want to donate to a charity in their home State; (b) charities that operate and solicit funds from taxpayers in one Member State but are legally established in another Member State; and (c) donors who wish to give to charities not registered in their home Member State. Under current tax laws, many Member States can discriminate in favor of domestic charities in a manner that arguably conflicts with the idea of the single market and consequently breaches European Law.

Before and particularly since the decision in Stauffer, the Commission has actively encouraged complaints regarding alleged Member State discrimination against foreign charities in the area of tax exemption. In 2002, the Commission sent a reasoned opinion to Belgium seeking the modification of Flemish, Walloon, and Brussels tax legislation that discriminated against foreign-based charities by limiting to domestic charities the benefits of reduced taxation of legacies and gifts. All three regions amended their tax laws to extend the benefits to charities located in other Member States, thus settling the matter relating to the Flemish and Brussels legislation. The Walloon amendments,118 however, did not satisfy the Commission.119 The reduced rates on gifts or inheritance tax did not apply when Walloon residents who never worked or lived in a particular Member State made legacies or gifts to charities in that State. The reduced rate also did not apply if a person who moved from another Member State to Belgium made a gift or legacy to a charity in a third Member State.120 Having referred the case to the Court of Justice in 2005,121 the Commission suspended temporarily the initiation of the procedure before the ECJ in 2006, in the apparent understanding that the infringement still existed but that the case would be reentered on a broader basis than merely inheritance tax.122

Since the decision in Stauffer, the Commission has begun action against the UK, Ireland, and now Belgium to end their discrimination against foreign charities in the area of direct tax. In each case, the Commission cites the preferential tax treatment of charities established in each Member State over foreign charities as incompatible with EU law, in particular as impeding the free movement of capital, contrary to the free movement of persons — because workers and self-employed persons moving to the infringing Member State might wish to make gifts to charities established in the Member State where they came from — and contrary to the freedom of establishment—because foreign charities are forced to set up branches in the infringing Member State in order to benefit from the favorable tax treatment. Proceedings against infringing States were delayed during 2007 when the respondents met with the Commission in an attempt to reach a resolution, but the end of negotiations in November 2007 means that the Commission is likely to resume proceedings against the three, with new actions pending against Denmark and France.123

The Commission’s infringement actions have borne fruit in some countries without court action. Cases against Poland, the Netherlands, and Slovenia will be set aside because the countries agreed to change their legislation to comply with EU principles. Given the Commission’s success in these cases, coupled with the strong precedent of Stauffer, it is hard to see how other Member States could convince the ECJ that discriminatory tax laws are compatible with EU law. In all cases, revenue authorities and ultimately national courts will be required to compare the public benefit requirements under national law for tax exemption with the activities or purposes of the foreign charity. Probable outcomes include greater clarity, clear justification of overriding reasons for treating otherwise comparable situations differently, and an end to discrimination based simply on non-residency. Success in these areas will arguably do more to facilitate philanthropy in general and cross-border giving in particular than any Council Regulation could hope to achieve.

In the intervening period, informal mechanisms assist donors of one Member State who wish to give tax-efficient donations to charities in another Member State. The Transnational Giving Europe Project, set up under King Badouin Foundation, is one example.124 The TGE Project consists of a network of large, accredited foundations in a growing number of European countries, including Belgium, France, Ireland, Germany, the Netherlands, Poland, and the United Kingdom. A donor wishing to donate to a foreign charity in one of the participating States contacts his or her national foundation, which then contacts its partner foundation in the recipient country for an assessment of the potential donee nonprofit. If the assessment is positive, the foundation in the home country accepts the donation from the donor and issues a tax receipt in compliance with national law before transferring the donation to the partner foundation on behalf of the intended beneficiary.

The TGE Project thus enables a donor to make a charitable gift to a foreign nonprofit and receive the same tax benefits as when making a gift to a charity in his or her own country. It eliminates the need for foreign charities in participating countries to establish branches in other Member States; and in the lag-time before the creation of a legally enabling environment for charities engaged in cross-border activities, it provides a stopgap measure in those countries where it operates. To date, TGE has proved particularly popular with academic institutions that solicit donations from individuals and companies and possess a significant number of alumni in other countries.125

IV. Conclusion: The Historical Politico-Legal Relationship Between Nonprofit Organizations and the Commission of the European Union

The Context of Review

The relationship of nonprofit organizations with the EU is a complex one that to be understood fully must be viewed through the lenses of history, politics, and law. Laws present a snapshot of rights and duties of various stakeholders, based on past political understandings between those parties, which are shaped themselves by preceding dealings and events. Legal reform is most effective when it involves an understanding of how relations between stakeholders have changed since the previous regulation (i.e., a political perspective) and an appreciation of the implications of this change for the power balance between those parties (i.e., a historical perspective).

If we apply this analysis to the treatment of civil society organizations under EU law, we find that historically, the Treaty Articles had little to say regarding the rights and responsibilities of nonprofit organizations, apart from the negative reference in what is currently Article 48 EC. This non-recognition of civil society organizations has changed, at least superficially, with the ratification of the Treaty of Nice, which specifically refers to “civil society” in its governing provisions.126 The Lisbon Treaty, which has yet to be ratified by all Member States, appears to build further upon the legal standing of such organizations in requiring European institutions to “maintain an open, transparent and regular dialogue with representative associations and civil society,”127 although the form that such participatory democracy will take (beyond the usual reference to “consultation”) and the sanctions for disobedience remain unspecified.

To reconcile the historical view of nonprofit organizations under EU law (i.e., non-rights holders in an economic community) with the emerging role of nonprofit organizations today (i.e., entities that are not only subject to the rigors of EU law but are increasingly viewed as a valuable communicative conduit between the Commission and the European demos and as a sounding board for Commission initiatives) requires some understanding of the political events that have brought about this change and the current political events that are likely to alter the relationship in the future.

Past Political Catalytic Events Affecting the Legal Enablement of Nonprofits

Notwithstanding the lack of formal legal standing upon which this paper has focused, certain nonprofit organizations have long enjoyed strong, informal policy relations with the Commission. For decades the European Commission relied largely on the field experience of development agencies and human rights groups in developing European policy in this area.128 The European Parliament129 and Council130 also reaffirmed the specific and irreplaceable role of NGOs and the usefulness and effectiveness of their development operations. Indeed, the strong relations forged between human rights and development organizations enabled their successful lobbying of EU institutions to bring development work within the pillars of the Treaty and to give this field (and NGO involvement in it) a constitutional underpinning at the time of the Maastricht Treaty in 1992.131 The success of this legal enablement of civil society in political terms may best be described as mixed. Although nongovernmental organizations now are legally entitled to work alongside the Commission and Member States in the development of policy, bringing development assistance within the Treaty has radically changed the balance of power between the parties, though perhaps not as anticipated by NGOs. In practice, the development assistance agenda must now compete for priority with the EU’s other objectives for external relations, which tend to be of an intergovernmental nature. These other objectives frequently take precedence over the concerns of development organizations.132

Aside from the admittedly exceptional case of human rights organizations, nonprofits have built informal collaborative relations with the Commission that have influenced the formation and change of policy. The Commission’s DG for Employment and Social Affairs (DG V), for instance, sought the participation of nonprofits in its Green Paper on Social Policy in 1993.133 A successful collaboration between DG V and social nongovernmental organizations led to the Commission’s establishment of the biennial European Social Forum, which provided greater opportunities for NGO/Commission dialogue. Moreover, the Commission’s heightened interest in social NGOs — albeit necessitated by the Commission’s inability to achieve consensus among Member States on social policy issues134 — provided the momentum that led to the publication of a joint DG V and DG XXIII135 Communication on the role of voluntary organizations in Europe in 1997.136

Given the Commission’s growing reliance on nongovernmental organizations to bridge the communication gap between the European institutions and the citizenry of Europe (often referred to as the democratic deficit, but maybe more correctly defined as the accountability deficit),137 it would be politically difficult for the Commission, on the one hand, to accept such support, while, on the other, refusing to endorse if not advocate a clear statement of the legal rights of these organizations.138 Politically, a clearer statement of rights of these organizations will not affect the balance of power between EU institutions and such nonprofits. The Commission, thus, has nothing to lose in championing their claims before the ECJ. Individual Member States will be most affected by any judicial rulings in favor of greater European legal enablement of nonprofits. It is extremely unlikely that the unanimity, necessary at Council level under Article 308 EC, to pass any regulation to facilitate the cross-border activities of nonprofits will be achieved by the States that will bear the costs of recognizing foreign charities in their own territories. If anything, national governments may be more willing to work together to redress the perception of a shift in the balance of power in their relationships with nonprofit organizations.

In this regard, one final political event deserves consideration, given its potential to affect the legal enablement of civil society organizations at European level — namely, the introduction by the UN’s Financial Action Task Force (FATF) of Special Recommendation VIII in 2004. Issued in the wake of the 9/11 terrorist attacks, Special Recommendation VIII seeks to prevent terrorist organizations from misusing nonprofit organizations: (i) to pose as legitimate entities; (ii) to exploit legitimate entities as conduits for terrorist financing, including avoiding asset-freezing measures; or (iii) to conceal or obscure the fact that funds intended for legitimate purposes are not clandestinely diverted to terrorist purposes. Special Recommendation VIII has given the European Commission, a reluctant if not uninterested regulator in the past, a political platform for coordinating the regulation of nonprofit organizations. Over the past three years, the Commission has issued draft recommendations,139 consulted nonprofit organizations throughout Europe,140 and issued a code of conduct for nonprofit organizations operating not just on a Europe-wide basis but also on a local basis.141

Recently, the Commission has maintained that it can regulate such organizations to fight not just terrorist-funding but also fraud.142 The potential to extend its remit beyond terrorist-financing was evident in the Commission’s Guidelines for Member States on national-level coordination structures and vulnerabilities of the nonprofit sector.143 The Commission’s expressed intention remains the same: to establish common principles for supervising nonprofits on which national implementation can be based. But that should not in any way hinder nonprofit organizations’ legal, cross-border activities.144 The recommended common principles make Member States responsible for overseeing nonprofit activities within their territories, facilitated through national cooperation between the relevant authorities responsible for registering such bodies, overseeing fundraising and banking activities, regulating tax exemptions and grant applications, and requiring annual reporting.

In addition to establishing a good infrastructure for nonprofit supervision, Member States are encouraged to promote compliance with the Commission’s Code of Practice amongst nonprofits, which, if achieved, would lead to similar transparency and accountability goals in each Member State. The coordination of supervisory responsibilities at a national level would aid cooperation between authorities in Member States, thus echoing the Court of Justice’s vision in Stauffer of national authorities sharing information in the furtherance of European affairs. As between individual Member States and the EU, the Commission cites potential roles for the European Anti Fraud Office (OLAF) in assisting in cooperation and information-exchange; and the European Police College (CEPOL) in training senior police officers to recognize vulnerabilities of the sector and typologies of abuse, as well as promoting cooperation/information exchange.

From a nonprofit perspective, the Commission’s recommendations are similar to those commonly issued by national charity regulators, which relate to the need for a clear mission purpose for each organization to which resources are applied; the importance of maintaining up-to-date governing documents that are publicly available; the maintenance of proper books of account; the use of formal channels for transferring funds; and the necessity for audit trails of fundstransferred outside the host Member State and of funds transferred to any person delivering service on behalf of the nonprofit. Lacking is any mention of sanctions for noncompliance, making the Commission, at best, a fledging regulator.

If implemented in a proportional, transparent, and properly resourced manner, the Commission’s Guidelines will aid nonprofit organizations throughout Europe by requiring each Member State to establish an adequate regime for regulating nonprofits. This regulatory initiative would not only develop regulatory regimes in Member States that perhaps lacked them in the past, but would require all Member States with existing regimes to review their practices for clarity, efficiency, and effectiveness. Implementation in this manner would help avoid nonprofit abuse while also providing opportunities for the type of Member State cooperation that should exist in an integrated Union. The stakes are high, however. If Member States implement the European guidelines half-heartedly, nonprofits will remain subject to disparate reporting requirements and national legal requirements, loosely justified by the Guidelines or the fight against crime more generally. Member State noncompliance might also diminish cooperation between national regulatory authorities and, as a result, hamper nonprofit activities across the Union.

Achieving true legal enablement of nonprofits within the European Union is thus a long-term and ongoing project. This article has argued that European legislation, even legislation focused on nonprofits, is unlikely to move that project forward. Paradoxically, the legal enablement of civil society may be better advanced through the Court’s adoption of a functional approach towards the rights and liabilities of nonprofit organizations under the Treaty’s fundamental freedoms. In light of this conclusion, great care should be taken in implementing European policies to counter terrorism and fraud in the operations of nonprofits, lest such policies become an excuse for Member States to erect or maintain national barriers to the free movement of civil society organizations in an integrated Union.

Notes

* Dr. Oonagh Breen, oonagh.breen@ucd.ie, is a professor in the School of Law, University College Dublin. This article was recognized with a Distinguished Research Award in the ICNL-Cordaid Civil Liberties Competition.

1 Within the EU, the power to tax is, in the words of Shaw, a “jealously guarded aspect of national sovereignty” ( SHAW, JO, JO HUNT & CHLOE WALLACE, ECONOMIC AND SOCIAL LAW OF THE EUROPEAN UNION (Palgrave, 2007) at 168. The raising of revenue through forms of direct taxation falls within the competence of the Member States and a reluctance to share or cede this power affects the EU’s ability to develop tax policies. This restraint on EU harmonization powers is evident in Arts. 93-95 EC (see after the coming into force of the Treaty of Lisbon Articles 113 -115 TFEU), which restrict the EU’s ability to legislate in the area of taxation to those occasions upon which there is Member State unanimity at Council level, making it an unlikely occurrence. See CONSOLIDATED VERSIONS OF THE TREATY ON EUROPEAN UNION AND THE TREATY ON THE FUNCTIONING OF THE EUROPEAN UNION, Official Journal C 115 of 9 May 2008.

2 See, e.g ., Why is a European statute for foundations needed?, European Foundation Centre 18th Annual General Assembly (AGA) and Conference, June 1st-3rd 2007, Madrid.

6 A regulation is a legal instrument of general application that is binding in its entirety and directly applicable in all Member States.

7 Congrès Internationale pour la Création d’une Société Commerciale de Type Européen, Report, published by Revue de Marché Commun (Paris), supplement to No. 27, July-August 1960. The Congress drew on the practical and academic legal expertise not only of those within the existing six Member States that constituted the EEC at the time but also boasted representatives from the UK, the United States and the Council of Europe. The Congress proposed the signing of a Convention between the six Member States to recognize a common form of trading company that would exist alongside the national forms in each Member State but would operate under uniform European rules, be registered in a central registry and subject to European judicial control. Tax matters relating to the company, however, would continue to be a matter for national law in each case. See further, Thompson, The Project for a Commercial Company of European Type (1960) 10 ICLQ 851, at 858.

8 See Proposal For A Council Regulation Embodying A Statute For The European Company, COM(70) 600, OJ C 124 (10.10.1970); Bull EC Supp 8/70 and Amended Proposal For A Council Regulation On The Statute For European Companies, COM (75) 150 final, (19.03.1975); Bull EC Supp 4/75.

9 On the general trials and tribulations relating to the legislative history of the European Company Statute see Sanders, The European Company, 6 GEORGIA JOURNAL OF INTERNATIONAL AND COMPARATIVE LAW (1976); Wehlau, The Societas Europaea: A critique of the Commission’s 1991 amended proposal, 29 CML Rev. 473 (1992); Edwards, The European Company — Essential Tool or Eviscerated Dream? 40 CML Rev 443 (2003).

10 Memorandum from the Commission to Parliament, the Council and the two sides of industry, “Internal Market and Industrial Cooperation — Statute for the European Company — Internal Market White Paper, point 137”, COM(88)320; EC Bull Supp 3/88, outlining the Memorandum of the Commission on the SE Statute (in which the Commission moved from having an obligatory board participation system for all SEs to giving companies instead the choice between different board participation systems. Seealso, the Commission Proposal OJ C 263, 16.10.1989, in which the Commission for the first time suggested splitting the SE legislation into a Regulation and a Directive. The latter aimed to deal with the controversial issue of employee involvement.

11 Final Report on European Systems of Workers Involvement of the Group of Experts (hereinafter referred to as the “Davignon Report”) May, 1997. The Davignon Group concluded that the national systems of workers’ involvement were too diverse, making general harmonization impossible. The report proposed that priority should be given “to a negotiated solution tailored to cultural differences and taking account of the diversity of situations.” It was agreed that the relevant parties should first try to agree on a worker participation model for each European company but if negotiations should fail, a set of standard rules would then apply instead.

12 See Council Regulation 2157/2001, OJ L 294 and Council Directive 2001/86/EC, OJ L 294/22, 10.11.2001. The objective of the Regulation, which came into force in all Member States in October 2004, is “to create a European company with its own legislative framework.”

13 Only six countries managed to meet the 8 October 2004 deadline for the transposition of the SE Directive, thereby preventing employees from their country from participating in negotiations in upcoming SEs, see Commission Press Release, Company law: European Company Statute in force, but national delays stop companies using it, IP/04/1195, 08/10/2004. In the overwhelming majority of countries the considerable delay was not caused by substantial national debates on the substance of the Directive but rather by an apparent lack of interest in the issue. See, e.g., Slovenian approach (last accessed May 23, 2008).

15 See Art. 3 Regulation 2157/2001 (providing that “Companies and firms within the meaning of the second paragraph of Article 48 of the Treaty and other legal bodies governed by public or private law, formed under the law of a Member State, with registered offices and head offices within the Community may form a subsidiary SE.”) The aforementioned Art 48(2) EC specifically excludes nonprofit organizations from its scope.

16 See, in this regard, Articles 9(1)(c) and 10 of Regulation 2157/2001.

17 The European Company is known by its Latin acronym Societas Europae or “SE” for short.

20 See Edwards, The European Company — Essential Tool or Eviscerated Dream? (2003) 40 CML Rev 443, at 463. On the various national implementing legal instruments.

21 See Edwards supra n. 20, at 463 (noting, “since many cross-border corporate structures are dictated by tax considerations more than any other factor, the availability of a pan-European instrument which leaves the existing mosaic of fiscal regulation untouched may prove to be irrelevant.”). See also, Winter, EU Company Law on the Move (2007) 31 LEGAL ISSUES OF ECONOMIC INTEGRATION 97, 98 (commenting that, “The trouble with the Statute, in its agreed-upon form, is that it precisely fails to achieve [its] objective. There is no uniform set of rules applying to the SE, as Member States were unable to agree to one set of rules.”)

22 Directorate General for Internal Market and Services, Report on Consultation and Hearing on Future Priorities for the Action Plan on Modernising Company Law and Enhancing Corporate Governance in the European Union (hereinafter, “Future Priorities Report”). The Report reported on the views of more than 270 interested parties who responded to the consultation; see further, Commission Press Release, Company law and corporate governance: public hearing on future priorities for the Action Plan, IP/06/574, May 4, 2006.

23 See Future Priorities Report, supra n. 22, at 22. Notably, the report itself takes a more positive approach to this figure, stating although at an early stage in its evaluation: “Still about 40% of the respondents considered the European Company Statute to be very useful or partly useful.”

24 Although COM 88/320, supra n. 10, at 15, suggested greater use of bilateral tax treaties to solve the taxation problems that would still be encountered by SEs, this solution has not proved practical in many cases.

29 Ibid. (noting that, “A few respondents, mainly from the private sector, considered that the Commission should focus on issues which directly relate to enhancing the competitiveness of profit making entities and the improvement of the functioning of the internal market.”).

30 Ibid. (stating that “ More than half of [those not in favor of introducing a new Statute] (mainly from the public sector, industry associations, representatives of the financial sector and some professional services providers) were sceptical as to the usefulness of such an instrument or would prefer other solutions to address the foundations’ requests.”)

31 Information for this comparison is drawn primarily from the EUROPEAN FOUNDATION CENTRE, FOUNDATIONS' LEGAL AND FISCAL ENVIRONMENTS — MAPPING THE EUROPEAN UNION OF 27 (2007).

32 These four States are chosen simply to illustrate existing national regulatory divergences — a combination of other Member States might not provide the same logistical difficulties but would provide others in lieu. Thus as Dube, Rossi & Surmatz point out in (Summer, 2007) EFFECT 13, “While you need at least 3,000 Euros to start a foundation in Copenhagen, Denmark, just a short drive across the Oresund Bridge in Malmö, Sweden, there is no such fixed requirement, although your assets should be adequate to pursue your planned purpose for five years. And if you set up a foundation in Cieszyn, Poland, you can run a business activity to generate income for it, but you can’t do so if you set one up just across the Friendship Bridge in Tešin, Czech Republic.”

41 Working Documents, Series A 2-196/86, January 8, 1987 (hereinafter “ The FONTAINE REPORT”).

42 European Parliament, Resolution on non-profit-making associations in the European Community, OJ C 99/205 (13 April 1987).

43 Article 12, Treaty Establishing the European Community [TEC] Consolidated Text, Official Journal C 321 E/48 of 29 December 2006. Article 12 will be renumbered by the Lisbon Treaty as Article 18 of the Treaty on the Functioning of the European Union [TFEU]; see Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, Official Journal C 306, 17 December 2007.

44 CEDAG, The Proposed Statute for a European Association: Background and Challenges, Document presented to the Liaison Group of the European Economic and Social Committee with civil society organizations and networks, Brussels, 28 February 2006. Seealso Gjems-Onstad, The proposed European Association: a symbol in need of friends? (1995) 6(1) Voluntas 3.

45 Germany and the United Kingdom are alleged to have subscribed to this view. See Jeremy Kendall & Laurent Fraisse, The European Statute of Association: Why an obscure but contested symbol in a sea of indifference and scepticism?, LSE TSEP Working Paper 11, June 2005.

46 Some Member States (most notably the UK) expressed concern as to whether Article 48 EC, which expressly excludes nonprofit entities from its scope, could provide a legal basis for the regulation for a Statute for European Associations, which by definition are nonprofit entities. Indeed, Perri ascribed the failure of the Statute as far back as 1995 to the disagreements among both Member States and the organizations themselves. See Perri, The voluntary and non-profit sectors in continental Europe, in J. D. SMITH, C. ROCHESTER AND R. HEDLEY (eds.), AN INTRODUCTION TO THE VOLUNTARY SECTOR (Routledge, 1995) at 141.

47 See Gjems-Onstad, supra n. 44, at 4, suggesting that, during this period, “it is obscure whether anybody, either outside or inside the official bureaucracy of Brussels, much cared about what happen[ed] to the proposals.” Seealso, BREEN infra n. 134.

48 Thus, the Greek Presidency in the first half of 2003 revitalized the consideration of the Statute for European Associations by prioritizing it during its tenure, according to Kendall & Fraisse, supra n. 45. Kendall surmises however that Greece’s “interest may have had more to do with the national Government’s wish to progress corporate legislation in general than a specific interest in the association sector as such.” The Irish presidency, which followed, chose to focus on the mutual statute to the exclusion of the association statute.

49 Published in November 2002 Modernisation of Company Law and Enhancement of Corporate Governance (last accessed May 23, 2008). In its recommendations the Group stated that it failed to see how uniform regulations of the European Association and European Mutual Society could be achieved if there was no agreement on harmonization of the underlying national rules. On the other hand, the Group acknowledged that the progress made on the SCE regulation (regulation for European Co-operative) represented an important precedent for the other proposed Regulations.

53 General reservations on the need for such a regulation have been expressed by Netherlands, Sweden, Finland, Germany, Ireland, Denmark, and Austria; while Italy has made a scrutiny reservation regarding the need for the regulation. These are apart from the more particular concerns of the UK delegation regarding the content of the proposed regulation and its likely effect on charity law. See Working Party on Company Law (EA) Council Documents 6873/03 (17 March 2003) and 8401/03 (10 April 2003).

55 See. e.g., Synthesis of the responses to the Communication of the Commission to the Council and the European Parliament “Modernising Company Law and Enhancing Corporate Governance in the European Union — A Plan to Move Forward” — COM (2003) 284 final of 21 May 2003: A Working Document of DG Internal Market, November 15, 2003, at 23. See also, the work of the European Foundation Centre, which produced a draft Statute for Foundations and successfully lobbied the Commission to carry out a feasibility study on a European Foundation Statute, a study which is expected to begin in late 2008.

56 See the speech of Commissioner for the Internal Market, Mr. Charlie McGreevy to the European Parliament’s Committee on Legal Affairs, November 21, 2006 (expressing caution regarding the introduction of a multiplicity of European corporate forms to the effect that he was “not yet convinced about the ability of a European Foundation Statute to respond to the specific needs of foundations.”) (last accessed November 29, 2007). Cf. the positive feedback given by Commission Official Nathalie Berger in support of proceeding with the plans for a European statute for Foundations at European Foundation Centre Conference, Towards a European Framework for foundations in Europe, Brussels, September 14, 2006.

58 Between 1957 and 2000 there were protocols to various Amending Treaties that did refer to charities and nonprofits organizations such as Declaration 23, Treaty on European Union, 1992 (providing, “The Conference stresses the importance, in pursuing the objectives of Article 117 of the Treaty establishing the European Community, of co-operation between the latter and charitable associations and foundations as institutions responsible for welfare establishments and services.”) and Declaration 38 of the Treaty of Amsterdam (“The Conference recognises the important contribution made by voluntary service activities to developing social solidarity. The Community will encourage the European dimension of voluntary organisations with particular emphasis on the exchange of information and experiences as well as on the participation of the young and the elderly in voluntary work.”). These declarations, however, have no legal basis in European law and thus do not provide a source of legal rights to such organizations.

59 See, after the coming into force of the Lisbon Treaty, Article 300(2) TFEU.

60 See, after the coming into force of the Lisbon Treaty, Art 54 TFEU.

61 See Article 43 EC (giving rights of freedom of establishment to all natural persons and companies), which is expressly qualified by Art 48(2) EC which provides that nonprofit organizations are excluded (“‘Companies or firms’ means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making.”)

62 Case C-70/95 Sodemare SA and Others v. Regione Lombardia [1997] 3 C.M.L.R. 591, 604 (The court went on to note, however, that material scope of the establishment freedom was not in any way affected by this holding since “national rules which treat non-profit-making companies differently from natural persons or commercial companies are not excluded, simply by virtue of Article 58, from the scope of application of Chapter 2 of Title III of the Treaty if their effect is to restrict the freedom of establishment of the latter. Otherwise, the simple exclusion of one category of legal persons from the benefit of Treaty rights would affect the extent of the rights actually enjoyed by other categories.”)

63 The FONTAINE REPORT, supra n. 41 stated that it could not be deduced that this provision was general in scope and aimed to exclude non-profit-making associations from any Community powers.

64 See, after the coming into force of the Lisbon Treaty, Article 18 TFEU.

65 See, after the coming into force of the Lisbon Treaty, Article 352 TFEU.

66 See, after the coming into force of the Lisbon Treaty, Article 114 TFEU.

72 The Fontaine Report actually refers to Article 8A of the SEA. Article 8A subsequently became Art 100A EC Treaty, is currently renumbered as Article 95 EC, and after the coming into effect of the Lisbon Treaty will be referred to as Art 114 TFEU.

73 Likewise, the Fontaine Report actually makes reference to the precursor of Art 308 EC, namely Art. 235 EC Treaty, which upon the coming into effect of the Lisbon Treaty will be renumbered as Art 352 TFEU.

74 Article 308 (Consolidated Version of The Treaty Establishing The European Community, OJ C 321 E/3, December 29, 2006) states that “If action by the Community should prove necessary to attain, in the course of the operation of the common market, one of the objectives of the Community, and this Treaty has not provided the necessary powers, the Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament, take the appropriate measures.”

76 See, e.g., Council of The European Union, Draft Council Regulation on the Statute for a European Cooperative Society (SCE); and Draft Council Directive supplementing the Statute for a European Cooperative Society with regard to the involvement of employees — Reconsultation of the European Parliament, DRS 58 SOC 384 (Brussels, 12 September 2002).

77 COUNCIL REGULATION (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), O.J. L 207/1, 18.08.2003.

78 See Case C-436/03, European Parliament v Council [2006] ECR I-3733 in which the Court held that the Regulation on the Statute for a European Cooperative Society was correctly adopted on the basis of Article 308 and not on the basis of Art 95 EC, as the Parliament had sought to argue. According to the Court, “the contested regulation, which leaves unchanged the different national laws already in existence, cannot be regarded as aiming to approximate the laws of the Member States applicable to cooperative societies, but has as its purpose the creation of a new form of cooperative society in addition to the national forms.”

80 See Communication from the Commission to the Council and the European Parliament: Outcome of the screening of legislative proposals pending before the Legislator, Brussels, COM(2005) 462 final, 27.9.2005.

81 See, e.g., EUROPEAN FOUNDATION CENTRE, PROPOSAL FOR A EUROPEAN FOUNDATION STATUTE, January 2005, which remains open to either Article 95 or Article 308 as potential legal bases for the legal instrument. See also the European Foundation Project, The European Foundation: A New Legal Approach (2005), which suggests both Articles 95 and 308 as the appropriate legal basis for a European Foundation Statute — which one might suggest is entirely inconsistent (last accessed December 4, 2007).

83 Council Directive 77/187/EEC of 14 February 1977 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses.

84 Case C-29/91, Opinion of AG Van Gerven [1992] ECR I-03189, at par. 6 -7 (commenting, “The actual text of the directive makes no distinction depending on whether an undertaking is commercial or non-commercial. . . The directive, it appears from the preamble thereto, was prompted by changes in the structure of commercial undertakings, caused by economic trends at both national and Community level. . . However, there is nothing in the wording of the directive to rule out a broad interpretation of the term “undertaking” used therein.”).

85 Supra n. 82, par. 18 (ECJ holding that “moreover, the fact that in this case the origin of the operation lies in the grant of subsidies to foundations or associations whose services are allegedly provided without remuneration does not exclude that operation from the scope of the directive. The directive, as has already been stated, is designed to ensure that employee rights are safeguarded, and covers all employees who enjoy some, albeit limited, protection against dismissal under national law.”)

89 See C-244/94 Fédération Française des Sociétés d’Assurance, Société Paternelle-Vie, Union des Assurances de Paris-Vie and Caisse d’Assurance et de Prévoyance Mutuelle des Agriculteurs v Ministère de l’Agriculture et de la Pêche [1995] ECR 1-4013, at par. 21; Joined Cases C-180/98 to C-184/98 Pavlov Stichting Pensioenfonds Medische Specialisten [2000] ECR I-6451, at par. 117 (holding that the fact that a pension fund is non-profit-making and the solidarity aspects emphasized by the fund and the governments which had submitted observations were not sufficient to relieve the fund of its status as an undertaking within the meaning of the competition rules of the Treaty.)

91 Communication from the Commission, Services of general interest in Europe (OJ C 17/04) 19.1.2001, at par. 30. The Communication goes on to state that “whenever such an organisation, in performing a general interest task, engages in economic activities, application of Community rules to these economic activities will be guided by the principles in this Communication respecting in particular the social and cultural environment in which the relevant activities take place.”

92 European Commission, Green Paper on Services of General Interest, COM(2003) 270 final, at par. 46 (noting that, “the evolving and dynamic character of this distinction has . . . raised concerns, in particular among providers of non-economic services who ask for more legal certainty regarding their regulatory environment.”).

94 Opinion of the European Economic and Social Committee on the “Green Paper on Services of General Interest” OJ C 80/66, 30.3.2004 (stating that, “In order to distinguish between economic and noneconomic activities, services associated with national education systems and the mandatory membership of a basic social security scheme, and services provided by not-for-profit social, charitable and cultural entities, must be exempt from competition rules and provisions relating to the internal market, but not from the principles of Community law.”)

96 On the history of the Italian nonprofit Banking Foundations see Piero Gastaldo, Let’s not forget the past — A commentary on “Italian philanthropy rediscovered” (Summer, 2007) EFFECT 18-19.

97 The Italian privatization process allowed public credit institutions, including savings banks (allocating entities’), to allocate their banking concerns to public limited companies established by them and of which they remained the sole shareholders. The newly created public limited companies performed the banking activities previously carried out by the allocating entities. Under the 1990 Italian decree allocating entities (i.e., foundations of banking origin) were required to pursue aims of public interest and social assistance, mainly in the sectors of scientific research, education, art and health. See Opinion of A.G. Jacobs in Case C-222/04 Ministero dell’Economia e delle Finanze v Cassa di Risparmio di Firenze SpA, Fondazione Cassa di Risparmio di San Miniato and Cassa di Risparmio di San Miniato SpA. [2006] ECR I-289.

98 Ibid., at par. 119 (“Such an activity is of an exclusively social nature and is not carried on on the market in competition with other operators. As regards that activity, a banking foundation acts as a voluntary body or charitable organisation and not as an undertaking.”)

109 See Ineke Koele, Cross-Border Philanthropy: Solving the “Landlock,” (2006) 8(1) SEAL 30, 32 (discussing who should bear the burden of proof as to whether a donation qualifies for tax relief); See also Case C-39/04 Laboratoires Fournier SA v Direction des vérifications nationales et internationals [2005] ECR I-2057 (to the effect that national law preventing a taxpayer from submitting such evidence could not be justified in the name of effectiveness of fiscal supervision).

110 Such assistance would be rendered under the Council Directive 77/799/EEC concerning mutual assistance by the competent authorities of Member States in the field of direct taxation (OJ 1977 L 336, 15.), as amended by Council Directive 2004/106/EC (OJ 2004 L 359, 30).

112 In this way, Stauffer builds on the earlier case of Barbier, which held that freedom of capital applies to gifts and comparable transactions within the EU irrespective of whether the donor or donee is carrying out economic activities that are protected by the freedoms of the EC Treaty. See Case C-364/01 The heirs of H. Barbier v Inspecteur van de Belastingdienst Particulieren/Ondernemingen buitenland te Heerlen[2003] ECR I-15013.

118 Article 60 of the Walloon “Code des droits de succession” and Article 140 of the Walloon “Code des droits d’enregistrement, d’hypothèque et de greffe” provide for a reduction of inheritance and gift taxes but only for two types of organizations: a) Organizations resident in Belgium and b) (for the application of the inheritance tax law) organizations established in the EU Member State in which the person making the legacy (the “de cujus”) effectively resided or had his place of work at the time of his death, or in which he had previously effectively resided or had his place of work and (for the application of the gift tax law) organizations in the EU Member State in which the donor effectively resides or has his place of work at the time of the donation, or in which he has previously effectively resided or had his place of work.

119 The press release reporting the Commission’s referral of the infringement to the Court of Justice in July 2005 stated that the Walloon law breached Articles 12, 43 and 48 EC thereby basing the Commission’s case on discrimination on the grounds of nationality and infringement of the freedom of establishment of salaried workers.

122 Source: GIVING IN EUROPE. This supposition has been borne out by the Commission’s issuance of a reasoned opinion requested Belgium to end its discrimination against foreign charities in the area of direct taxation — see Commission Press Release IP/06/1879, December 21, 2006.

127 See after the coming into force of the Lisbon Treaty, the new Article 11 TEU.

128 DG VIII/B/2, the department in the Development Directorate General of the Commission is colloquially known as the “NGO Unit.”

129 See EP Resolution of 14 May 1992 on the role of NGOs in development cooperation, June 15 1992, OJ (C 150) 273 (1992) (emphasizing in particular the key role of NGOs’ work on behalf of marginal social groups in developing countries, the need to preserve the NGO’s freedom of action, and the vital role of NGOs in promoting human rights and the development of grassroots democracy.)

130 Council resolution on Community cooperation with nongovernmental development organizations, (May 27, 1991), Bull. EC 5-1991, point 1.3.76, underlining the importance of the autonomy and independence of NGOs in the context of development assistance in a Council Resolution on cooperation with the NGOs.

131 In the context of non-governmental development organizations, Article 181 EC, as inserted by the Maastricht Treaty, states that: “Within their respective spheres of competence, the Community and the Member States shall cooperate with third countries and with the competent international organizations. The arrangements for Community cooperation may be the subject of agreements between the Community and the third parties concerned, which shall be negotiated and concluded in accordance with Article 300.” See, after the coming into effect of the Lisbon Treaty, Article 211 TFEU.

132 See, e.g., The Convention on the Future of Europe’s Final Report of Working Group VII on External Action (Brussels, 16 December 2002) CONV 459/02, which makes minimal reference to development cooperation and instead approaches development policy from a perspective of strategic interests within the broader sphere of the common foreign and security policy (“CFSP”).

133 European Commission, Green Paper on European Social Policy, COM (93) 551 final.

134 This, occurring in the wake of the UK government’s veto of the incorporation of a new Social Chapter in the Maastricht Treaty in 1992 resulting in political stalemate that forced the Commission to explore less controversial ways of keeping social policy on the reform agenda. One such alternative was to engage social NGOs in policy dialogue, which soon became known as “civil dialogue.” See further BREEN, CROSSING BORDERS: COMPARATIVE PERSPECTIVES ON THE LEGAL REGULATION OF CHARITIES AND THE ROLE OF STATE-NONPROFIT PARTNERSHIP IN PUBLIC POLICY DEVELOPMENT, Thesis (J.S.D.) — Yale Law School, 2006.

135 DG XXIII is the Directorate General in charge of Enterprise Policy, Distributive Trades, Tourism and Cooperatives.

136 Interview by author with Pádraig Flynn, former EU Commissioner for Employment and Social Affairs, in Dublin (January 11, 2005).

137 Given the lack of representativeness among many nonprofit organizations it would be difficult for the EU to argue that the type of federated umbrella organizations with which it likes to deal are a proxy for dealing with the Union’s citizens. However, the intermediary role that these organizations play, once recognized as a channel for communicating with citizens and not an alternative for so doing, is nonetheless of value to the Commission.

138 Two recent examples of such reliance on NPOs related to the period of negotiations preceding the referenda on the ill-fated Treaty for a Constitution on Europe in 2002-2004 and the period before the accession of the ten candidate Eastern European States in 2004, both occasions on which the Commission’s professed support for the role of NGOs in ensuring democratic accountability and participatory democracy.

139 European Commission Directorate-General Justice, Freedom And Security, Draft Recommendations to Member States Regarding a Code of Conduct for Non-Profit Organisations to Promote Transparency and Accountability Best Practices: An EU Design for Implementation of FATF Special Recommendation VIII — Non-Profit Organisations (Brussels, July 22, 2005).

141 European Commission, The Prevention of and Fight against Terrorist Financing through enhanced national level coordination and greater transparency of the nonprofit sector, COM(2005) 620 final (Brussels, November 29, 2005).

142 A Commission-sponsored survey regarding the scope and extent of nonprofit financial abuse in Member States, to which the author has contributed, is currently underway. The Commission hopes that greater empirical data will enable it to better grasp the issues facing nonprofit organizations active in the EU and enable the Commission eliminate opportunities for financial fraud without unduly interfering with the diverse philanthropic endeavors undertaken by these organizations.

143 See supra n. 141, at 8-9 (stating, “While the focus of the present Communication is to prevent abuse of NPOs by terrorist financing, the enhanced transparency and accountability measures will also help to protect organisations from other forms of criminal abuse. The Recommendation and the Framework for a Code of Conduct should therefore enhance donor confidence, encourage more giving, while preventing or at least reducing the risk of criminal abuse.”)